Executive Summary:
- The decision to provide funding may not be attributed to a Member State only when it is mandated by the EU, not when EU law allows Member States to decide whether to provide funding.
- Relief from the cost of compliance with regulatory requirements confers an advantage in the meaning of Article 107(1) TFEU.
- The state may amend technical regulations without being liable for the costs incurred by undertakings.
- Subsidising one technology over other technologies that can be used for the same purpose can confer a selective advantage.
- When a public authority assures an undertaking that its investment is eligible for state aid and that undertaking starts work before the aid measure is formally authorised by the Commission, the aid may still satisfy the formal incentive effect.
- When a project can be carried out by an undertaking relying solely on its own resources, i.e. when the project is profitable, state aid lacks a substantive incentive effect.
Table of Contents:
Part II: (In)compatibility with the internal market
The Commission found the measure to be incompatible with the internal market. Therefore, the rest of this article focuses on the reasons for the incompatibility of the measure.
Formal incentive effect
The Commission, first, examined the formal incentive effect; i.e. the start of works. In its opening decision, the Commission had expressed doubts because the DTT operators began their investment as of March 2017, while the relevant legal acts were adopted in May 2017, July 2017, and lastly in August 2018.
In this respect, “(271) Czechia explained that the DTT operators actively anticipated the release of the 700 MHz band already in the period 2013-2016 in the framework of the public discussions of the procedure and the proposed measures. For this reason, the DTT operators would have invested in the transition even before March 2017, even if those costs are not subject to any compensation … Czechia argued that the fact that the process was agreed by consensus between the Czech authorities and the affected DTT operators does not remove the incentive effect of the measure”.
“(273) Account must be taken of the wider context, including the communications from the national authorities … before starting the investments [a recipient] received assurances related to the compensation mechanism from the Czech authorities already before March 2017”.
“(275) Even if as noted in … the Opening Decision, the 2016 Strategy is not the legal basis of the measure stricto sensu (i.e. conferring a right to receive the aid), the fact remains that the 2016 Strategy was a key document on the basis of which the beneficiaries could derive reasonable assurances that they will operate one if the transitional networks covered by the measure. Therefore, some beneficiaries could start the works for the construction of the transitional networks on the basis of the 2016 Strategy.”
“(276) In this regard, the formal incentive effect can also be derived from the existence of precise assurances provided by the Member State to the beneficiaries, which allowed them to start the works at their own risk. The fact that all costs had been incurred before the approval of the measure by the Commission is not definitive for the (in) existence of a formal incentive effect. In this respect, the Commission considers that the elements enumerated in recital (272) are sufficient to demonstrate that the Czech authorities provided precise assurances to the three beneficiaries, which were sufficient to justify the early start of the works until the formal adoption of the acts providing for the measure.”
“(277) In view of the above, the formal incentive effect is not negated by the early start of the works ahead of the formal adoption of the acts providing for the measure. However, the existence of such a formal effect is not sufficient since the notified measure requires a substantive incentive effect.”
Substantive incentive effect
With respect to the substantive incentive effect, the Commission examined whether the investments could take place without state subsidies. “(286) In the Opening Decision, … the Commission expressed doubts that the notified measure has an incentive effect because there were commercial benefits for DTT operators that could incentivise them to invest in the technological upgrade on their own initiative: (i) the migration entails the technical upgrade of the networks, increasing their capacity and quality, (ii) the Digital Amendment entitled operators to extend their licenses until 2030, improving the predictability for the investments, (iii) the Czech authorities’ ambition to deploy two additional networks in the future could be viewed as a positive prospective for market development”.
The Commission, first, considered that “(292) the fact that the regulatory intervention triggered DTT operators to invest outside their normal investment cycle is not sufficient to conclude that the beneficiaries did not have an incentive to invest on their own initiative. In particular, the operation of the transitional networks brings benefits mostly to the three DTT operators, allowing them to transition to the upgraded technology while reducing the risk of a loss of audience in the process. Furthermore, the equipment covered by the compensation is partly reused in the final networks. … the notified measure includes compensation for the accounting depreciation of the equipment during its use in the transitional networks, but such accounting depreciation goes beyond the actual wear and tear of the equipment. Therefore, the Commission considers that the notified measure also contributes to finance the upgrade of the final networks.”
“(294) In this situation, where the operation of the transitional networks offers clear commercial benefits to the three DTT operators, where the compensation also finances partially the investment costs in the upgraded final networks and where there was a positive market outlook with investment predictability until 2030, it is of great importance to ascertain whether the beneficiaries would have invested on their own initiative.”
“(296) The Commission acknowledges that ex post information provided by the Czech authorities on the DTT market shows that CRa and DB have generated lower revenues and had lower profitability in the years immediately after the transition. Nevertheless, even if the transition could lead to lower profitability in the short term, it could have positive effects in a longer timeframe (assuming that lower revenues and lower profitability are the actual result of the transition and not of other causes, like the interest of the end users to use more diversified services and channels provided by other platforms). In addition, an accelerated accounting depreciation can also lead to lower profitability in the short term. Further, without a counterfactual analysis, it is not possible to ascertain whether the transition has in fact not prevented a worse financial outcome (e.g. losing audience to other platforms) if the investments would have not taken place. In any event, the Commission observes that the profitability of CRa and DB did not seem at risk after they have covered the investments for the transition. In particular, the profitability of CRa at group level was at a similar level before (i.e. in 2017) and after the transition (i.e. in 2023). The profitability of DB had declined after the transition, but its profit margin remained at [0 – 50]% (recital (106)).”
“(298) In this situation, the Commission considers that Czechia has not demonstrated that the lower revenues and profitability experienced by CRa and DB immediately after the transition were caused by the regulatory intervention (or rather by other market developments). Neither Czechia has quantified the differential impact (if any) of the regulatory intervention on the medium-term profitability of DTT operators. Taking into account the lack of business plans and the evolution of the DTT platform after the transition, the Commission considers that Czechia has not justified that the regulatory costs outweigh the potential positive commercial benefits for the operators.”
“(299) In any event, even assuming that the regulatory costs could outweigh the potential commercial benefits (or even assuming an absence of commercial benefits), there is no indication that the possible impact on the profitability of DTT operators would pose a risk to the continuity of the DTT platform. Furthermore, the Commission considers that the ex post data further confirm that the DTT market is stable and that the three beneficiaries have not been heavily impacted by the regulatory obligations (CRa and DB have remained profitable after the transition and the budget of Česká televize is largely above the cost of operating the transitional network). The Commission therefore considers that the DTT operators were in a position to absorb the regulatory costs. This is further confirmed by the continued profitability of the alleged beneficiaries in the absence of the payment of the aid. Adding to that, the DTT market has remained relatively stable after the transition, which should provide stability to investments, albeit with a market share declining from 60% to 52.9%, By contrast, in the situation assessed in Decision in case SA.55953, the DTT market share in Slovakia had experienced a sharp decline of at least 45 %, retaining only less than 10 % after the transition.”
“(301) Therefore, the Commission concludes that the notified measure lacks incentive effect. Since the notified measure does not have an incentive effect, it cannot facilitate the development of an economic activity. Even only for this reason, the notified measure cannot be considered to be compatible with the internal market under Article 107(3) c) TFEU. The Commission shall nevertheless assess the other conditions required in order for a measure to be deemed compatible with the internal market under that provision, for completeness.”
Market failure
Next the Commission examined whether there was a market failure that required state intervention.
“(324) First, the Commission differentiates between the regulatory obligations imposed by Czechia (i.e. the upgrade to DVB-T2/HEVC and the operation of transitional networks) and the notified measure (i.e. that aims to provide compensation of the costs related to the operation of the transitional networks). While the regulatory measures alone could be beneficial for the development of DTT … and may have positive effects …, the Commission considers that the compensation lacks an incentive effect because the three DTT operators were in a position to absorb the regulatory costs imposed by Czechia without putting at risk the continuity of DTT services … On the contrary, the share of DTT services among TV broadcasting services has remained relatively stable in Czechia, also after the transition (i.e. a share of 52.9% in 2023) … Absent an exceptional situation, which the Commission could not identify in the present case (nor there is proof submitted as regards the existence of such an exceptional situation), undertakings are expected to bear the costs that are inherent to their economic activity.”
“(325) Therefore, since the investment would have taken place in the absence of the measure, this already indicates that the notified measure does not bring a material improvement, as the market could not deliver that outcome by itself. Further, even in the assumption that costs of the regulatory obligations imposed by Czechia could have outweighed the incremental benefits for the three beneficiaries … the Commission has found that the three beneficiaries were in a position to absorb those costs for compliance with the regulatory obligations. The Commission recalls that the costs of regulatory obligations are inherent to the economic activity of operators and should in principle be borne by the undertakings operating in that market. In any case, a market failure (thus the necessity of aid) cannot be based on the need to preserve a certain level of profitability of the beneficiaries of the envisaged measure.”
“(327) One beneficiary argued in this regard that Czechia had to find a compromise solution acceptable to the DTT operators that held rights of use in the 700 MHz band, otherwise exposing itself to the risk of long-term litigation and international arbitration … However, a market failure cannot be established on the basis of a potential risk of litigation, but it needs to be established whether the market would not have produced the same outcome, in the absence of the compensation covered by the notified measure. Moreover, the notified measure does not concern a settlement during a damage claim action, but compensation for regulatory costs.”
“(329) Therefore, the measure cannot be considered necessary given that it does not aim at remedying a market failure.”
Appropriateness
With respect to the appropriateness of the aid, the Commission concluded that regulation instead of subsidisation would have been less distortionary and therefore more appropriate means of intervention.
“(333) Therefore, the Commission finds that taking into account that the DTT operators would have had interest in incurring the investment costs, the imposition of regulatory obligations would have been sufficient to achieve the objectives pursued by Czechia, namely to ensure the continuity of the provision of services on the DTT platform and ensure the migration of those services in the sub-700 MHz band while providing for a technological upgrade, without the need for compensation for the operation of transitional networks. Therefore, the imposition of such regulatory obligations alone, without the compensation of the eligible costs, would have been more appropriate.”
Proportionality
First, the Commission examined the length of the period during which broadcasting occurred simultaneously on the basis of old and new technical standards [“simulcast”]. In this respect it clarified that “(357) it does not question the national competence to adopt regulatory measures for the DTT platform (in compliance with the EU framework) on account of the technical, economic and social dimension of the migration process. The Commission must however assess whether the notified compensation for costs related to those regulatory measures was proportionate. That compensation covers the costs for the operation of the transitional networks during the entire simulcast period.”
“(359) The Commission considers that the disproportionately long simulcast primarily benefited the three DTT operators, contributing to accustom and maintain their customer base. Furthermore, …, the Commission considers that the calculation of the depreciation costs based on the accounting life of the equipment does not reflect the longer economic life of the equipment, thus resulting in higher depreciation costs than necessary, with the effect that the measure also finances the upgrade of the final networks through the reuse of the partly subsidised equipment. Given that the effects of depreciation accrue over time, the disproportionate duration of the simulcast further amplifies the transfer of part of the financing to the final networks.”
Next it examined the parameters for determining the amount of compensation. It “(370) acknowledge[d] that depreciation/amortisation is a standard practice to quantify wear and tear over time. However, accounting depreciation costs are only adequate to calculate the costs linked to the operation of the transitional networks to the extent that they are based on the economic life of the equipment. This is particularly important in the case at hand given that the equipment has been re-used in the final networks. If the equipment is depreciated at a faster rate (than the economic life) during the operation of the transitional networks, and those higher depreciation costs are compensated by the State, this has the effect of financing to a great extent the final networks. Further, in the notified measure, depreciation costs are the main component of the compensation”.
“(372) Therefore, the Commission considers that the notified compensation is higher than necessary in respect of the CAPEX costs of the equipment (i.e. approximately 200% higher, when calculated using a 5-year accounting life instead of 10-year economic life). This way, the notified compensation for the operation of the transitional networks in fact also contributes to the financing the upgrade of the final networks (i.e. approximately 50% of the eligible CAPEX costs of the transitional networks are transferred to the final networks), given that the reused equipment could be used until the end of its economic life.”
“(381) Lastly, the Commission could not establish that the aid is kept to a minimum since the information available does not demonstrate that the accelerated implementation of the DVB-T2 standard as a result of the regulatory obligations outweighed the commercial benefits and if so, to what extent (there was no funding gap analysis).”
Conclusions
In the end, the Commission prohibited the Czech Republic from implementing the measure which was badly designed. The shift to the new standards would be costly but still profitable for the three DTT operators. A simple regulatory obligation imposed on the operators without compensation would have been a less distortionary means of intervention.
On more technical issues, this case is instructive in that it makes it clear, first, that regulatory reform need not make the state liable for compensation for the costs incurred by undertakings. Second, even if the formal incentive effect is satisfied, the substantive incentive effect may still be failed. Third, there can be a significant difference between accounting depreciation and actual depreciation during the economic life of an asset.
